Cement makers caught in two-way bind

Having borne the brunt of policymakers on price regulation two years back when the going was good, the cement industry now finds itself left in the lurch as a crisis in demand looms large, writes Sumant Banerji.

Cement manufacturers around the country are in a tizzy. Having borne the brunt of policymakers on price regulation two years back when the going was good, the industry now finds itself left in the lurch as a crisis in demand looms large.

The industry grew significantly in the last three years with a average growth in revenue of 28 per cent per annum and profit growth of 68 per cent between March 2005 and 2008. Cement production grew from 147 million tonne in 2004 to almost 200 mt in 2008 and is projected to reach a level of over 250 mt by 2012.

The growth so far has been in line with the demand situation led largely by the real estate and infrastructure boom. In the current fiscal however, the situation has turned worrisome with real estate sector reeling under a slowdown. The fall in demand led to a lower growth in revenues between April-December 2008 at 11.4 per cent while profitability took a hit falling by 22 per cent.

“The government has done well to ensure a GDP growth of almost 9 per cent per annum in its tenure. That itself led to a robust demand for cement as emphasis was laid on building infrastructure,”said H M Bangur, managing director, Shree Cements.

The capacity addition continues. In 2007-08, 30 mt capacity was added while the figure for the current fiscal 08-09 is estimated at 45 mt. The slowdown will have its impact on capex next year when the figure is not expected to exceed 30 mt.

Though the future looks rosy, the skirmishes with government over pricing have set a bad precedent that makes the ride uncertain.

"Price of cement was always dictated by market. If tomorrow the demand crumbles and prices soften the government is not going to help us," said N Srinivasan, vice chairman and managing director, India Cements.